The Silvergate saga, explained

The Silvergate saga, explained

After a solid start to the year, crypto and stock markets have lost some steam since mid-February. [Spencer Platt via Getty Images]

There’s never a dull moment on the blockchain. Here’s what you need to know this week:

Silvergate’s woes are dragging on the crypto market. A closer look at the crypto-friendly bank’s series of issues.

Key cryptoverse quotes. Elon Musk roasted trend-hopping in the tech industry, and Snoop Dogg’s wacky web3 endorsement.

Noteworthy numbers. The percentage of Ethereum stakers that are currently in profit, and 3 more stats to know this week.

BEAR AT THE GATE

How Silvergate Bank’s troubles are impacting crypto markets

After holding steady above $23,000 throughout much of February, Bitcoin has fallen roughly 6% in the past week, pressured by persistent inflation concerns, the specter of regulatory enforcements from the SEC, and negative crypto industry headlines. One of the biggest drivers of the latter has been the unraveling of Silvergate Bank, a bank best known for serving some of the largest firms in the crypto industry. Last week, Silvergate shuttered its crypto services due to insolvency concerns and delayed filing an annual report to the SEC, citing “heightened regulatory scrutiny.” As Silvergate’s problems stack up, we’re breaking down the basics you need to know.

What is Silvergate Bank?

Silvergate Bank was one of the earliest banks to provide commercial banking services to crypto exchanges and other digital assets businesses, largely through its Silvergate Exchange Network. SEN, which was shuttered last week, was a 24/7 instant settlement service that allowed clients to transact at any time, unlike a typical 9-5 bank. This was ideal for crypto exchanges, as crypto markets operate at all times, well outside the schedule of traditional markets. Major companies including Coinbase, Kraken, Gemini, and Paxos formerly relied on Silvergate’s services.

Why is Silvergate facing issues?

Silvergate’s issues are connected to the collapse of FTX late last year. Prior to FTX’s collapse, the bank held $16 billion in deposits, about 90% of which were crypto related. The bank wasn’t engaged in many of the risky practices that led to the downfall of other firms, like uncollateralized loans and hedge fund bets. But the bank run caused by initial concerns over FTX’s financial stability led to about $8 billion in customer deposits being withdrawn from the publicly traded bank in the last three months of 2022.

These withdrawals forced Silvergate to quickly liquidate many of its bond investments in order to pay depositors, leading to it realizing a $1 billion loss for the final quarter of 2022. Silvergate says that they’re also facing potential investigations from bank regulators and the Department of Justice. Their stock is now more than 90% below the all-time high reached in November 2021, and analysts believe the shuttering of SEN, their flagship product, is a sign they’re considering ceasing all operations.

What are the implications for the crypto industry?

The closing of SEN means that crypto firms will now need to find other onramps between digital assets and dollars. Coinbase, Paxos, Gemini and Crypto.com are among the established firms to have already cut ties with Silvergate. Signature Bank, a Silvergate competitor, has emerged as a popular alternative option.

Meanwhile, Silvergate’s losses led the firm to announce last week that it was evaluating the viability of a path forward. This week it was reported that the bank was in discussions with the FDIC regarding its current financial situation.

Why it matters… News about Silvergate’s troubles comes at a moment when regulatory scrutiny is ramping up across the industry — even White House Press Secretary Karine Jean-Pierre said the administration is monitoring the situation. Regardless of the outcome for Silvergate, its troubles will likely remain a key talking point for regulators and the crypto industry in the months ahead.

TAKES

Elon Musk roasts tech’s trend hoppers, Snoop Dogg’s zany web3 endorsement, and key quotes from the week

Artificial interests… “I used to be in crypto, but now I got interested in AI” was how Elon Musk revealed his change of heart on Twitter last week. Or, wait, did he? The statement was delivered in quotation marks, suggesting that the famously crypto-boosting CEO was mocking the current trend of people declaring they’ve moved on to the next industry craze. Joke or no joke, his comment seems to have contributed to a drop in Dogecoin’s price, a token that has frequently gone up and down based on his tweets about it. 

Sorry sight… “I am unbelievably sorry for my role in all of this” was the message of contrition from Nishad Singh, the former director of engineering at collapsed crypto exchange FTX, as he pled guilty to criminal charges in the U.S. last week. Singh represents the third close associate of former FTX CEO Sam Bankman-Fried to plead guilty and cooperate with the government’s investigation of him, in which he faces 12 criminal charges.

Stretch goals... “Web3 and crypto can save the capitalist narrative” was the prediction issued by Animoca Brands chairman Yat Siu during a recent interview with Decrypt. (No pressure, crypto!) Siu’s argument: These technologies can “reintroduce the value of democracy” to people, particularly in the West, who have grown disenchanted from their experiences with these systems. 

Hop Dogg… “Turns out, I’ve been a kangaroo this entire time” was how Snoop Dogg explained the news that he had formed a partnership with Roobet, a crypto gambling site available in some markets, though not the U.S. (The kangaroo thing? A kangaroo appears on Roobet’s brand logo.) Snoop has long been a ubiquitous presence and experimenter in the land of web3 (remember when he and Eminem rapped as their NFT avatars?), so much so that Roobet wasn’t even his only partnership announcement in the space this week! 

NUMBERS TO KNOW

$8.9 billion

The amount of missing customer funds that FTX can’t account for, per a public presentation last Thursday. This marked the first time the bankrupt crypto exchange identified exactly how much money has gone missing since its November collapse. FTX said it has found $2.7 billion of customer money so far.

142,000 BTC

The amount of recovered BTC (worth roughly $3 billion) expected to begin making its way back to Mt. Gox creditors this Friday, nearly a decade after the now-defunct crypto exchange — which was one of the earliest on the market — was hacked and drained of 850,000 BTC in 2014. Market onlookers are waiting to see if the large repayments will impact BTC’s price, especially if creditors choose to liquidate, adding sell pressure across the market.

20

The approximate number of personnel that the Securities and Exchange Commission has added to its new Crypto Assets and Cyber Unit since May 2022, almost doubling the size of the 50-person operation. Now, amid the SEC’s recent campaign of enforcement actions against the crypto industry, the agency has announced it is “planning to add additional staff.”

16%

The percentage of Ethereum stakers that are currently in profit ahead of ETH’s Shanghai upgrade, slated for April. Shanghai will finally enable stakers to withdraw staked ETH, leading some to speculate about market impact when holders are finally able to sell. But with a small amount of stakers able to realize gains, the upgrade could see stakers stay in the market until more favorable conditions arise.

TUNE IN

A closer look at how crypto donations aided Ukraine in the earliest days of Russia’s invasion

ICYMI: Coinbase is spotlighting stories from the community about how crypto is solving real problems around the world. First up: how crypto is helping with humanitarian aid in Ukraine. Join host Yusuf Omar as he travels to Poland for a first-hand view of how crypto donations became vital for Ukrainians, whether they escaped the war or stayed in their country to fight the Russian occupation.

DISCLAIMER

This material is the property of Coinbase, Inc., its parent and affiliates (“Coinbase”). The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Coinbase or its employees and summarizes information and articles with respect to cryptocurrencies or related topics that the author believes may be of interest.

TOKEN TRIVIA

What is a DEX?

A

The native crypto for the Dash blockchain

B

A peer-to-peer marketplace where transactions occur between traders

C

A disincentivized exchange

D

A way for banks to facilitate crypto lending

Find the answer below.

Trivia Answer

B

A peer-to-peer marketplace where transactions occur between traders